Return to search

Reuters – Exclusive: Private Equity Rolls Into Republic Tobacco – Sources

(Reuters) – Private equity firms Carlyle Group LP and Pamplona Capital Management LP are among a handful of parties weighing bids for Republic Tobacco, a privately held company that makes the Drum brand of loose tobacco in the United States, Reuters reported August 16.

These buyout firms are pursuing Illinois-based Republic Tobacco even as some of their private equity competitors, including Blackstone Group LP, CVC Capital Partners Ltd and Advent International Corp, decided not to pursue a bid due partly to investor concerns about investing in controversial industries, sources said.

Investors in private equity firms often have restrictions on investing in so-called “sin” businesses such as tobacco, alcohol, gambling or weapons. The limited partners can negotiate opt-outs from individual fund deals.

Pamplona, a London-based investment house backed by Russian tycoon Mikhail Fridman, has a different investor base from the largest U.S. private equity firms, which count pension funds and social endowments in California and New York as some of their major limited partners.

Carlyle, Pamplona, Blackstone and Republic Tobacco declined to comment. Advent and CVC Capital Partners, which looked at, but passed on Republic Tobacco, according to the sources, did not respond to requests for comment. The sources asked not to be identified because the matter is not public.

“My sense is there will be some LPs who would say we are not going to do it and many who say go ahead,” said Steven Kaplan, a University of Chicago finance professor whose research focuses on private equity.

Republic Tobacco, which is said to be seeking as much as $2 billion according to some of the people, has also attracted interest from Britain’s Imperial Tobacco Group Plc, one of the people said.

“We’re always interested in potential acquisition opportunities, provided they would deliver value for our shareholders. We do not, however, comment on rumour or speculation,” an Imperial Tobacco spokesman said.

Japan Tobacco Inc also expressed some interest in the auction of Republic Tobacco. The auction is being run by Credit Suisse Group AG, the people said. Credit Suisse declined to comment.

However, they cautioned that Japan Tobacco has had a long-stated strategy of staying out of the U.S. market where it sees high risk of litigation.

Its new President Mitsuomi Koizumi reiterated last week the company was not considering expanding into the United States. When asked on Wednesday about its potential interest in Republic Tobacco, the company said it does not comment on future acquisition possibilities.

Private Equity’s Tobacco Appetite

While robust financing markets have boosted private equity appetite for leveraged buyouts in recent months, Republic Tobacco has attracted only a small number of buyout firms partly due to the controversial nature of the business, according to the people familiar with the matter.

Limited partners such as California Public Employees’ Retirement System, California State Teachers’ Retirement System, Florida State Board of Administration, and many pension funds in New York often encourage so-called “socially responsible investing”.

Some avoid businesses involved in alcohol, tobacco, gambling, pornography and weapons.

The most famous acquisition of a tobacco company by private equity was KKR & Co LP’s $25 billion leveraged buyout of RJR Nabisco in 1988, a battle that was immortalized in the 1990 bestseller “Barbarians at the Gate”.

KKR sold its remaining stake in RJR in 1995 and major buyout firms have since been wary of investing in tobacco companies as the industry’s challenges mounted, while some limited partners decided to stay out of such investments.

A private equity bid for Franco-Spanish tobacco firm Altadis failed in 2007 after PAI Partners dropped out of a consortium with CVC, allowing the company to be taken over by Imperial Tobacco.

Tobacco companies are often seen as defensive investment plays because they trade in consumer staples, but cigarette smoking is in decline in many developed markets due to a shift in regulations as well as popular culture.

As a result, tobacco companies like Altria Group Inc, Reynolds American and Lorillard often rely on price increases to drive sales growth.

Republic Tobacco’s major product lines include cigarette tobacco, cigarette papers, filtered tubes, accessories, pipe tobacco and cigars. Other brands the company owns include Top tobacco and Job rolling papers.

Republic Tobacco is owned by D.R.L. Enterprises, a holding company founded in 1969 by Chicago entrepreneur Donald Levin. D.R.L has businesses in aircraft, medical equipment, machinery leasing, film making and licensed sports product manufacturing.

(Reporting by Soyoung Kim and Greg Roumeliotis in New York; editing by Carol Bishopric)